From the Virginia Society of Certified Public Accountants - Presented
by Dean Knepper, CPA, CFP®

ARE YOUR 2007 ESTIMATED TAXES ON TRACK?

(April 1, 2007) -- Most — but not all — taxpayers need to settle
up with Uncle Sam on April 17. Those who are required to pay estimated taxes
aren’t quite as lucky. Payments are required four times a year —
and the first payment for the 2007 tax year is due on April 17.

If you’re wondering who needs to make estimated payments, how much to
pay and when, and what happens if you don’t comply, the Virginia Society
of CPAs has the answers.

Who must pay estimated taxes?

An individual is required to pay estimated taxes if your tax liability for
the year, after credit for withheld taxes, is $1,000 or more. Estimated tax
is the method the Internal Revenue Service (IRS) uses to collect tax money on
a pay-as-you-earn basis for income that is not subject to withholding. Taxpayers
who have other significant income that is not subject to withholding may be
required to pay estimated taxes. Examples include investment income, alimony,
and rental income.

When do you pay estimated taxes?

For the purpose of estimated taxes, the IRS divides the year into four payment
periods. You may pay your 2007 estimated tax in four equal amounts according
to the following schedule:

Each payment represents roughly one quarter of the tax you will owe for the
year.

How much estimated taxes do you need to pay?

In most cases, the safest route to paying enough in estimated taxes is to use
the prior year safe harbor. That means if your adjusted gross income for 2006
was $150,000 or less and you are either single or married filing jointly ($75,000
for married taxpayers filing separate returns), you can avoid paying a penalty
by paying estimated taxes equal to 100 percent of the amount of your total tax
shown on your prior year’s tax return. If last year’s adjusted gross
income was more than $150,000, your safe harbor amount is 110 percent of the
amount of total tax shown on your prior year’s tax return.

If, based on your situation, you believe that using the prior year’s
safe harbor may result in overpayment, there is another option available. You
also avoid paying a penalty when your estimated payments for 2007 equal 90 percent
of this year’s income tax liability.

Are there options to paying estimated taxes?

Not looking forward to making four tax payments a year? If you or your spouse
has wage income in addition to your untaxed earnings, you may be able to arrange
for extra withholding to cover your estimated tax bill. There are two ways to
do this. You can reduce the number of allowances you claim or you can request
that a specific “additional amount” be withheld from your paycheck.
Since it’s difficult to determine how much changing your allowances will
affect your withholding, it’s best to calculate your estimated tax bill
and request to have that amount withheld over the course of the year.

To file your estimated taxes, use Form 1040-ES, Estimated Tax for Individuals.
This form includes instructions, a worksheet, and four numbered payment vouchers.

What happens if you don’t comply?

If you do not pay enough estimated tax by the due date of each of the payment
periods, you will be assessed an estimated tax penalty that is due on your tax
return filing date. The interest rate used to compute the penalty changes quarterly
based on market conditions. The penalty applies even if you are due a refund
when you file your income tax return.

Need help?

If you’re not sure whether you are on track with your estimated tax payments,
you should consult with a CPA as soon as possible. If you wait until later in
the year to catch up, you could face a late payment penalty, even if the total
amount you pay covers your tax liability.

The Virginia Society of CPAs is the leading professional association
dedicated to enhancing the success of all CPAs and their profession by communicating
information and vision, promoting professionalism, and advocating members’
interests. Founded in 1909, the Society has nearly 8,000 members who work
in public accounting, industry, government and education. This Money Management
column and other financial news articles can be found in the Press Room on
the VSCPA Web site at www.vscpa.com.